Gazprom's Bid for Serbia's NIS Brings Pros and Cons for Europe

Gazprom Raises the Stakes

Russian gas monopoly Gazprom has upped its 400-million-euro (US$586.4-million) bid for a 51% stake in Serbian oil monopoly Naftna Industrija Srbije (NIS), as it pushes to close a deal before the onset of presidential elections in Serbia on Sunday (20 January). The higher bid follows an open letter from Gazprom deputy chairman Alexander Medvedev earlier this week, which offered to invest in new gas storage facilities and to direct the proposed South Stream gas pipeline via Serbian territory on the condition the NIS bid was accepted (see "Related Articles"). The increased offer is a reflection of Gazprom's determination to obtain the controlling stake in NIS, a move which would immediately secure for the Russian gas giant a dominant role in the Serbian oil and gas sector. Furthermore, with Russian President Vladimir Putin currently visiting Bulgaria in an effort bid to foster closer energy relations with that country—and expected to secure a deal today that will see Bulgaria participate in the South Stream pipeline project—the NIS acquisition could form part of a wider push to secure Gazprom's position and increase its share in the growing Balkan energy market.

However, the Serbian government remains divided over the offer, with some suggesting the bid substantially undervalues the NIS stake. Economy Minister Mladjan Dinkic this week indicated the government could achieve a price of five to eight times the Gazprom bid if it offered the stake via a competitive tender process. In fact, the low level of Gazprom's initial offer suggests the deal it was seeking was not solely commercial, and might be viewed by Russia as a pay-off for its support for the Serbian government's resistance to the independence of Kosovo. Still, the Serbian government's ongoing division over the NIS sale is an indicator that the matter is far from clear cut. Indeed, the relative pros and cons of Gazprom's potential acquisition of NIS will depend largely on the perspective from which the deal is viewed.

The European Perspective

For Europe, the deal will be seen as a continuation of Gazprom's inexorable march into the region's downstream energy markets. With the acquisition of NIS, Gazprom would secure a company with a dominant national position with respect to oil and gas exploration and production, importing, transporting, refining, and marketing. By controlling the country's two refineries—Pancevo and Novi Sad—Gazprom could also tie Serbia in to Russian-sourced crude imports, as well as gain dominance over the local and regional petroleum products markets.

However, it may be Gazprom's accompanying offer to direct the proposed South Stream gas pipeline via Serbia that would have the widest-ranging consequences. With Hungary already expressing its commitment to the project and Bulgaria poised to do so, support from Serbia would secure Gazprom a possible transit route from the Black Sea to Central Europe. It would also open up opportunities for a possible southern leg of the pipeline, cutting across the western Balkans to northern Italy. As such, Serbia's participation would further raise the prospects of the South Stream proposal proceeding.

At the same time, the move could also be seen as a blow to the European Union (EU)-backed Nabucco project, which also proposes to deliver gas via the Balkans to Central Europe, but intends to tap into Caspian and/or Middle Eastern supplies rather than gas from Russia. While the respective developers have insisted the pipelines are not rivals, there are still strong doubts over whether they could operate simultaneously. Certainly, a considerable motivation behind Russia's pursuit of the South Stream pipeline is a desire to continue to control the key gas import routes into Europe, thereby ensuring its continued position as the dominant supplier, a position which would become somewhat more tenuous if the Nabucco pipeline was realised. As such, Gazprom's play for NIS, and its accompanying offer to sign Serbia on as a partner in the South Stream pipeline project, is likely to undermine Europe's ability to diversify its gas sources and should therefore be seen as negative in terms of Europe's overall energy security.

The Russian Perspective

In the view of Gazprom and the Russian government, however, a deal to acquire NIS would represent a successful attempt by the gas giant to expand its operations beyond Russia as well as provide benefits to Europe's energy security. It would give the Russian gas firm a base of operations in the Balkans, while Gazprom's commitment to build new underground gas storage facilities in Serbia could ensure against a repeat scenario of the mid-January 2006 disruption in Russian gas supplies to south-eastern Europe, where a cold snap and increased gas demand prompted Ukraine to take more than its allotment of Russian gas from its transit pipelines, leaving Gazprom's south-eastern European customers short of gas. Having access to gas in storage in the central Balkans in Serbia could thus allow Gazprom to more readily meet unexpected increases in demand in the region.

What is more, a Gazprom deal for NIS would bring with it a further commitment by the gas giant to build the South Stream pipeline via Serbian territory. Together with a further Russian agreement with Bulgaria on the pipeline, a Gazprom-NIS deal means that the chances for the realisation of this project—which would open up a new gas import supply corridor to Europe—increase dramatically. Construction of the South Stream pipeline would ensure that more Russian gas flows into Europe, as well as reduce the leverage that both Ukraine and Belarus have over Russian gas exports. Indeed, the South Stream pipeline would mean that both Europe and Russia are less dependent on gas that must flow via these frequently problematic transit states.

Outlook and Implications

If the participation of Serbia in the South Stream pipeline has both pros and cons for European energy security—pro in the sense of ensuring gas supply stability, con in the sense of reducing the chances for supply source diversification—perhaps the deciding factor in whether a proposed Gazprom-NIS is "good" or "bad" for Europe is the merit of the NIS deal on a stand-alone basis. In this case, the Gazprom offer seems undervalued due to its incorporation of political matters. With other interested companies—such as Austria's OMV and Hungary's MOL—standing by, and NIS valued at considerably more than Gazprom's offer, it would be in Europe's best interest if a fair and open tender process was run to ensure that the full value of NIS was reflected in the purchase price.

Indeed, the incorporation of "political equity" in a commercial deal is likely to be a precedent that Europe would not want to set. Clearly, Europe does not want Russia drawing on its influence over former Soviet-era allies to secure preferential deals. In this case, Russia is clearly seeking some "payback" from Serbia for support on the Kosovo issue, with Gazprom looking to cash in with a discounted deal for NIS. With the situation delicately poised, the Serbian government's decision—along with the Serbian elections to be held in the weekend—is likely to be pivotal not only in determining future control of the Serbian energy sector, but also in establishing Serbia's broader long-term allegiance towards Europe or Russia.

Related Articles

Serbia: 16 January 2008: Gazprom Seeks Answers on NIS Takeover

Serbia: 15 January 2008: Gazprom Ups Pressure on Serbia over Oil Monopoly Takeover

Russia: 20 December 2007: Russia: How Russia Can Make More Gas Available to Europe

Serbia: 14 December 2007: Serbians Sign Energy Partnership Agreement with Russia for South Stream Pipeline, Storage

Hungary: 10 December 2007: Hungary Officially Joins Gazprom and Eni's South Stream Pipeline

Bulgaria: 9 November 2007: Ministers from Russia, Bulgaria Sign Declaration for South Stream Pipeline

Serbia: 25 October 2007: Gazprom Targets Serbian Gas Assets; MOL, Srbijagas Sign Winter Supply Deal

Austria: 17 October 2007: Russia Invites Austria to South Stream Gas Pipeline Project

Turkey: 26 June 2007: South Stream Pipeline Threatens Turkey's Role in Gas Transit to Europe